Is the Consensus Right or Wrong About China?

Was it Churchill who originated the phrase, ‘Never let a good crisis go to waste’? Citing the exceptional circumstances of Brexit, today we had the Italians asking the EU to allow them to bail out their own banks to avoid the now familiar bail in process of hitting shareholders and depositors first.

Brexit and its impact on tech jobs and companies: A cheat sheet -  TechRepublic

“Nein” was the response from Germany who reminded the Italians it is shareholders and depositors who must take the first hit. Perhaps Brexit is not a big enough crisis. The Italians will have to take their medicine and they may well trigger the next Euro calamity brexit millionaire reviews.

Meanwhile is Brexit just the cover the Fed needs to avoid that darned interest rate increase they seem very keen to avoid. The immediate response of Brexit was a mark up in US treasuries and the dollar, so no need to raise US rates if the dollar gains hold. We have to wait until the July 26th Fed meeting for confirmation.

And China?

Is it just another crisis about to develop into a full scale ‘hard landing’ as the economy implodes or is there another story? For several years now it’s been a standard hedge fund bet.

As 2015 ended, several high profile hedge funds went public with their expectation of a Chinese Yuan collapse. It sounded as if they were just talking their own book in desperation. The bets had been huge options and derivative proxy trades which have been expiring worthless again and again as the Yuan has refused to collapse fast enough. Betting against central banks is seldom a good idea and the Peoples Bank of China declared war on those hedge funds by supporting the Yuan.

“Betting against the Chinese currency became such a popular trade among hedge funds earlier this year that billionaire investor Bill Gross compared it to the speculative attack on Britain’s pound in 1992. Some of the industry’s biggest names, including Kyle Bass of Hayman Capital Management and Crispin Odey of Odey Asset Management, have said they’re wagering on another big drop.”¬†Bloomberg.

This losing trade had become so popular that it was almost total consensus and it still is despite several funds bailing out as the losses became unsustainable.

So, have the majority got it wrong? Maybe it’s time to listen to a contrarian. Hugh Hendry, the controversial head of Eclectica Asset Management is one who once followed the consensus trade and made money, but no longer. He maintains the Chinese will avoid the hard landing scenario and, “if they devalue by 20%”it will be dire for the¬†rest of world trade.

China has population growth on its side. Its dramatic industrial revolution and developing service economy could well power GDP growth for decades as western economies stagnate economically, held back by falling birth rates and ageing infrastructure. Could it be that there is a massive misunderstanding by global investors and that China’s growth is sustainable and not just a bubble as so many analysts suggest?

In the short term, China will be helped if it can devalue, particularly against the US$ helping Chinese exports to be even cheaper. Brexit has just helped it out, and the US. The flight into the US dollar last Friday, now reduces the need for the Fed to raise rates helping the US economy. It also has the effect of devaluing the Yuan as the chart shows. At a stroke, two immediate problems are solved.

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